Watchdog tweaks mortgage rules for insurers, banks

The Office of the Superintendent of Financial Institutions has waded into the country’s mortgage market in recent years as part of a global effort to prevent another crisis like the one that occurred in the U.S. with subprime lending.

Canada's banking and insurance watchdog has made some changes to the rules that mortgage insurers and banks must follow to minimize their risks from homeowner loans.

The Office of the Superintendent of Financial Institutions on Thursday released a final set of rules that mortgage insurers must follow to minimize their risks, making some small changes to the draft rules it had released earlier this year. It has also made some minor changes to the rules that banks must follow when selling mortgages.

One of the most notable changes is that the regulator is now spelling out criteria banks must meet to verify the income of borrowers, especially those who are self-employed.

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OSFI has waded into the country's mortgage market in recent years as part of a global effort to prevent another crisis like the one that occurred in the U.S. with subprime lending. Global bodies like the Financial Stability Board, which gets its mandate from the G20, recommended that all countries review their mortgage rules.

As a result OSFI released a set of rules in 2012 that spelled out for the first time the basic steps that it expects banks and other federally-regulated mortgage lenders to take when they underwrite mortgages. That set of rules, which is collectively called "guideline B-20," pushed lenders to be more cautious in areas such as credit checks on borrowers, document verification and appraisals. It also capped the amount that any individual can borrow on a home equity line of credit at 65 per cent of the home's value.

Because the guideline had a slight tightening impact on the mortgage market, observers say that it contributed to the decline of Canadian home sales that occurred in late 2012 and early 2013. This latest changes are not expected to have any noticeable effect on the housing market.

In April of this year OSFI released a draft set of rules for mortgage insurers ("guideline B-21"). The draft, which spells out what mortgage insurers must do to minimize their risks, was open for public consultation. A big part of it essentially said that mortgage insurers are responsible for double-checking the steps that banks take when they are assessing borrowers.

Having received and digested comments from the industry about the draft rules, OSFI is now releasing the final version. And it has made some changes, not only to its draft rules for mortgage insurers but also to its rules for banks, as a result of the feedback it received, including the new specifications on income verification.

It has also clarified its position on cash-back payments. OSFI received some resistance from the industry about the rules that limit "cash-back" incentives on mortgages. Some players told the regulator that borrowers with cash-back mortgages do not have a higher default rate than others, and some argued that eliminating the incentives could hurt some mortgages that qualify for government-funded housing affordability programs.

OSFI says that it does not prohibit the use of cash-back incentives and rebate payments, but it does not want those payments to count toward down-payments unless they are related to government-backed affordable housing programs.

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It also added language that suggests mortgage insurers should look beyond a mortgage borrower's income and ability to service debt and also consider their assets or savings.

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